30 year mortgage, but overpay monthly

sophi123

We saw a broker last night who was explaining that there is no guarantee that when you come to the end of your fixed rate mortgage that a lender will then let you extend your term (i.e. if we take a 25 year mortgage and then want to extend the mortgage after 2 years to reduce costs when you have kids, letting us extend the mortgage term to 28/30 years).


We are young enough to take a 30 year mortgage. What we wondered was are there any disadvantages in taking a 30 year mortgage, but then overpaying monthly to take the monthly payments up to the amount they would have been if we were on a 25 year mortgage?


And then, if finances is good, applying to reduce the term of the mortgage in the future?


What are the downsides of this? Would we end up out of pocket?

kingstreet

It's a good idea.

Just make sure the overpayments don't exceed any annual penalty-free allowance.

You won't end up out of pocket.

lee111s

You also have to be 100% committed and actually make the overpayments. As they're voluntary, many people think "oh I'll not pay it this month and buy X instead".


If you're disciplined, you can drastically reduce the term and therefore the interest you pay on a mortgage.

getmore4less

WHat you pay determines what a mortgage costs you

The term just sets a minimum contractual payment at the begining

pinkteapot

Agree with all the comments above - if you have the discipline to actually overpay, you get the best of both worlds. You get lower monthly repayments, which is handy if life throws up a lemon (redundancy, ill health, etc), but you can still pay the mortgage off when you originally wanted to.

We took our mortgage over the longest term our lender would give us (28 years) but are aiming to pay it off in 14 years instead. I transfer our overpayment money to the mortgage at the start of each month and our monthly 'spends' budget is what's left, so we never really see the overpayment money or think of it as ours to do anything else with.

We think of our normal monthly repayment as being like the "minimum amount due" on a credit card.

As above, you may be constrained by a maximum amount you can overpay if you get a 2/3/5/10 year deal (you'll usually be limited for those initial years at a 'deal' rate).

One other thing to note - you mentioned "the end of your fixed rate mortgage". You're not actually talking about the end of the mortgage. You're talking about the end of the introductory fixed rate. You could just keep the mortgage, carry on paying it each month, and go onto the variable rate that follows the introductory rate.

It seems to be becoming ever more normal for people to think of mortgages as 2/3/5 year products where you have to remortgage at the end. There are fees to pay when you remortgage so it's not always the best thing to do.

The_Fat_el_Hombre

Some of them don't have fees though do they pinkteapot? I'm a FTB looking at buying a place with a 20% deposit, there's a good rate form santander that is interest free for that. When the introductory rate ends I will look to remortgage and I 'm hoping that with my deposit I will be able to pick up another mortgage with no fees (so I'd just have to pay 300-400 in solicitor fees for switching). Are my hopes realistic

kingstreet

First, you may have the option of a customer retention product from your existing lender. This may or may not involve a product fee.

When you remortgage to a new lender, you may have a discharge fee to pay to your existing lender and there may be valuation, legal and product fees to pay to the new one. Alternatively, these new lender fees may be paid for you.

It's a question of comparing like with like and ensuring you are getting the best value for money on the overall deal.

pinkteapot

The_Fat_el_Hombre wrote: »

Some of them don't have fees though do they pinkteapot? I'm a FTB looking at buying a place with a 20% deposit, there's a good rate form santander that is interest free for that. When the introductory rate ends I will look to remortgage and I 'm hoping that with my deposit I will be able to pick up another mortgage with no fees (so I'd just have to pay 300-400 in solicitor fees for switching). Are my hopes realistic

I was referring to the total cost of switching - not just any product application fee. Your switch does have a cost (fee), as you say. There's the legal fee you mentioned, possibly a valuation survey fee (not always, like the mortgage fee).

We were with Santander and switched to HSBC and Santander have a £225 "account fee" which you either pay at the start or end of the mortgage. It's basically an admin fee, so we paid that when we switched, having opted not to pay it at the start. It's all part of the costs of switching.

My point was simply that some people assume you switch every time you come to the end of an introductory deal but you may not, and there's certainly no obligation to. It's worth looking at the total cost of doing so versus the saving on a new rate.

I was simply saying that OP shouldn't think of the end of the fixed rate period as "the end" of the mortgage. We've had panicked posters on here before whose circumstances have changed, they wouldn't now qualify for a mortgage, and they've thought that they have to re-apply at the end of their fixed rate.

Thrugelmir

At a point there'll be little or nothing to be gained from switching lenders. So playing musical chairs is all very well. However one eye should be on the long term future.

Thrugelmir

sophi123 wrote: »

What are the downsides of this? Would we end up out of pocket?

Some figures for comparison.

25 year mortgage of £150,000 5% interest rate for entire term of mortgage

Monthly payment £876.89p Total Repayable £263,065.52p. Of which interest is £113,065.52p.

Extend term to 30 years then figures become £805.23p; total£289,883.68p ; interest £139,883.68p.

That extra £71 a month you have in your pockets results in an extra £26k of interest payable over the term of the mortgage.

Hopefully this is stark enough to focus your minds as to what's important in life.

goodmorningsunshine

pinkteapot wrote: »

........I transfer our overpayment money to the mortgage at the start of each month ........

Can I ask - how you do this, I had a stressful time at the bank yesterday trying to make an overpayment to my mortgage?


More details on the thread I will be starting very soon.